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Yarn v. Hamburger Law Firm, LLC

United States District Court, Fourth Circuit

September 24, 2013

STEVE YARN, et al., Plaintiff,
v.
HAMBURGER LAW FIRM, LLC, et al., Defendant.

MEMORANDUM OPINION

RICHARD D. BENNETT, District Judge.

This is a diversity action brought by Plaintiffs Steve Yarn, Karen Yarn, and Yarn & Co., Inc. against Defendants Hamburger Law Firm, LLC, Brian Hamburger, Robert J. Seco, Alan N. Walter, Robert K. Ross, and MarketCounsel, LLC, for professional malpractice, intentional and negligent misrepresentation, and breach of contract. Pending before this Court is Defendants' Motion to Dismiss (ECF No. 6) pursuant to Federal Rule of Civil Procedure 12(b)(6). The parties' submissions have been reviewed and no hearing is necessary. See Local Rule 105.6 (D. Md. 2011). For the reasons that follow, the Motion of Defendants Hamburger Law Firm, LLC, Brian Hamburger, Robert J. Seco, Alan N. Walter, Robert K. Ross, and MarketCounsel, LLC to Dismiss (ECF No. 6) is GRANTED IN PART and DENIED IN PART. Specifically, Defendants' Motion is GRANTED with respect to Count II (Intentional Misrepresentation), Count III (Negligent Misrepresentation), and Count V (Gross Negligence) of Plaintiffs' Complaint and DENIED with respect to Count I (Legal Malpractice) and Count IV (Breach of Contract).

BACKGROUND

This Court accepts as true the facts alleged in the plaintiff's' complaint. See Aziz v. Alcolac, Inc., 658 F.3d 388, 390 (4th Cir. 2011). Plaintiffs Steve and Karen Yarn are founding members of Yarn & Co., Inc., an insurance investment firm. Pls.' Compl. ¶ 20. Plaintiffs hired Defendants Hamburger Law Firm and "affiliated firm" MarketCounsel, LLC to provide "legal advice" with respect to the creation of certain investment vehicles. Pls.' Compl. ¶ 31. Defendant Brian Hamburger is the founder and managing member of both of the Defendant limited liability companies. Pls.' Compl. ¶¶ 21-22. Defendants Walter, Seco, Cota, and Ross were employed by the Hamburger Law Firm or MarketCounsel and allegedly provided legal services to Plaintiffs. Pls.' Compl. ¶ 29. Plaintiffs allege that "Defendants indicated that they could structure an investment' vehicle for the Plaintiffs and employ appropriate structure and investment products to comply with Maryland law and to raise capital in Maryland and pay investors back at a 6% annual rate on any investment." Pls.' Compl. ¶ 33. Defendants provided these legal services from 2003 through January, 2011. Pls.' Compl. ¶ 34.

It is alleged that, during Defendants' representation of Plaintiffs, Defendants made a number of errors, specifically:

• Defendants "encouraged the Plaintiff to make any potential investors an investment client, ' notwithstanding that if the Plaintiff did so, any solicitation of funds from that individual would then violate Maryland law." Pls.' Compl. ¶ 37. In accordance with this advice, Defendants allegedly "had the Plaintiffs execute Investment Advisory Agreements' with each Maryland insurance client who wished to invest funds with the Plaintiffs, " thereby placing Plaintiffs and the clients in a fiduciary relationship. Pls.' Compl. ¶ 39.
• Defendants "required" Plaintiffs to "sign forms for submission to the Maryland Attorney General, Maryland Securities Division in blank, " which Defendants then would submit without prior approval of Mr. Yarn. Pls.' Compl. ¶ 40. Among these submission, Defendants allegedly "list[ed] the Maryland Investors with a fraudulent address" in order to exempt the investors from Maryland law. Pls.' Compl. ¶ 41.
• Defendants listed themselves as the escrow agents in the materials distributed to investors, but the bonds that Defendants had recommended could not be held in escrow; Plaintiffs allege that the Defendants knew or should have known this fact. Pls.' Compl. ¶ 42.
• Plaintiffs relied on Defendants to determine the appropriate investment vehicles, but Defendants selected unnecessarily risky investments; accordingly, Plaintiffs allege that "[t]hrough the poor advice of the Defendants, the funds which were raised were mismanaged by the Defendants and resulted in a wholesale loss of equity." Pls.' Compl. ¶ 45.

Ultimately, Plaintiffs allege that these violations "triggered first an audit and then a cease and desist order and resulted in a wholesale failure of the Defendant to guide Plaintiffs action or to achieve or even be aware of the compliance requirements." Pls.' Compl. ¶ 47. Specifically, the Maryland Attorney General, Securities Division issued a Cease and Desist Letter to Plaintiffs on September 22, 2009. Pls.' Compl. ¶ 64. Plaintiffs allege all of the included violations pertained to "regulations upon which [Plaintiffs] had relied on Defendants for compliance." Pls.' Compl. ¶ 65.

Subsequently, Defendants sent a letter identifying a potential conflict of interest with respect to their further representation. After recognizing the charges against Plaintiffs, the letter states:

In responding to the pleadings you may wish to assign all or part of the reasons behind your actions and inactions to inadequate legal advice that may have been given by the Hamburger Law Firm. You may believe that HLF would not raise this issue on your behalf.
Based on the facts known to us at this time, we have determined that we can represent you and Yarn & Co. in this Proceeding.

Pls.' Compl. ¶ 67. Plaintiffs characterize the conflict as "clear, obvious, and unambiguous, " but state that Defendants never recognized or acknowledged the existence of a conflict. Pls.' Compl. ¶ 82.

Plaintiffs also allege that Defendants refused to proceed to trial on behalf of the Plaintiffs and refused to provide independent counsel. Pls.' Compl. ¶¶ 70-71. Moreover, Plaintiffs allege that Defendants "coerced" Steve Yarn to sign a consent order in order to avoid bad publicity. Pls.' Compl. ¶ 76. Accordingly, Defendants Steven Yarn and Yarn & Co. signed a Consent Order on January 10, 2010.

The action currently pending before this Court was initiated on September 13, 2012 when Plaintiffs filed suit in the Circuit Court for Baltimore City, Maryland. Subsequently, Defendants removed to this Court on October 19, 2012 pursuant to 28 U.S.C. § 1332. On November 2, 2012, Defendants filed their Motion to Dismiss. Thereafter, Plaintiffs filed a response and Defendants rebutted with a reply memorandum.

Plaintiffs' Complaint contains five counts. Plaintiffs' first count asserts a legal malpractice claim based upon various actions and recommendations provided to Plaintiffs during the course of Defendants' legal representation. In the second count, Plaintiffs allege intentional misrepresentation[1] arising out of Defendants' statements in the September 2009 conflicts letter and their advice concerning the repercussions of Yarn's signing of the consent order. Alternatively, Plaintiffs assert a negligent misrepresentation claim for the Defendants' assertions about their proficiency and experience, their advice regarding the consequences of signing the Consent Order, and their statements in the conflict letter. The fourth count asserts a breach of contract claim, while the final count contains a gross negligence claim. On each count, Plaintiffs demand $15 million. Additionally, Plaintiffs demand punitive damages in the amount of $500 million for their intentional misrepresentation claim and $200 million for their gross negligence claim.

STANDARD OF REVIEW

Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P 8(a)(2). Rule 12(b)(6) of the Federal Rules of Civil Procedure authorizes the dismissal of a complaint if it fails to state a claim upon which relief can be granted. The purpose of Rule 12(b)(6) is "to test the sufficiency of a complaint and not to resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006).

The Supreme Court's recent opinions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), "require that complaints in civil actions be alleged with greater specificity than previously was required." Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012) (citation omitted). The Supreme Court's decision in Twombly articulated "[t]wo working principles" that courts must employ when ruling on Rule 12(b)(6) motions to dismiss. Iqbal, 556 U.S. at 678. First, while a court must accept as true all the factual allegations contained in the complaint, legal conclusions drawn from those facts are not afforded such ...


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